ASX edges lower after US government move limits SVB damage

The collapse has left economists and analysts trying to work out whether Silicon Valley Bank’s fate is an isolated incident, or a canary in the coal mine that points to vulnerabilities in the financial system brought about by the last year of interest rate hikes.

Betashares economist David Bassanese said on Monday morning that no matter what happens next with SVB, the situation is unlikely to be resolved quickly and might even be enough for the Federal Reserve to pause interest rate rises next month.

″Depending on the fallout in the next few days, moreover, the mayhem will likely be enough to encourage the RBA to pause at the April meeting also,” he said.

Higher rates tend to hit hardest on investments seen as the riskiest and most expensive, such as cryptocurrencies and the furor around money-losing Silicon Valley startups.

“There are starting to be cracks that are appearing,” said Brent Schutte, chief investment officer at Northwestern Mutual Wealth. “SVB is a warning for the Fed that their actions are beginning to have an impact.”

The Fed has already raised rates at the fastest pace in decades and made other moves to reverse its tremendous support for the economy during the pandemic. It’s effectively pulling money out of the economy, which can tighten the screws on the system.

“This is a warning sign that the liquidity is draining, and the most vulnerable areas are starting to show it, which tells me the rest of the economy is not too far behind,” Schutte said.

Wall Street already in February gave up on hopes that cuts to interest rates could come later this year. Worries then flared this week that rates are set to go even higher than expected after the Fed said it could reaccelerate the size of its rate hikes.

Friday’s jobs report helped calm some of those worries, which led to some up-and-down trading. Overall hiring was hotter than expected, which could be a sign the labor market remains too strong for the Fed’s liking.

But the data also showed a slowdown from January’s jaw-dropping hiring rate. More importantly for markets, average hourly earnings for workers rose by less in February than economists expected.

That’s crucial for Wall Street because the Fed is focusing on wage growth in particular in its fight against inflation. It worries too-high gains could cause a vicious cycle that worsens inflation, even though raises help workers struggling to keep up with rising prices at the register.

Among other signs of a cooling but still-resilient labour market, the unemployment rate ticked up and the percentage of Americans with or looking for jobs edged up by a tiny bit.

Such trends mean traders are pulling back on bets the Fed later will go back to a hike of 0.50 percentage points later this month. They’re now largely betting on the Fed sticking with a more modest 0.25 point hike, according to CME Group.

Last month, the Fed slowed to that pace after earlier hiking by 0.50 and 0.75 points.

Such expectations, along with worries about banks, helped send Treasury yields sharply lower.

The yield on the 10-year Treasury plunged to 3.69 per cent from 3.91 per cent late on Thursday, a sharp move for the bond market. It helps set rates for mortgages and other important loans.

with AP

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